It hardly seems fair that unemployment checks are taxed, but as many Americans have learned the hard way, those are the breaks. With more than 14 million people out of work at the close of 2010, many of those on a desperate quest to make ends meet were blindsided with the bad news. According to a surveyhttp://abcnews.go.com/Business/tax-tips-unemployed-deductible/story?id=12862638">survey> conducted by an income tax preparation service, nearly 40% of adults don't realize that unemployment benefits are taxable. And of that number, a quarter believe that unemployed people can simply bypass tax filing all together.
The confusion may stem from some of the guidelines enacted in the economic stimulus package in 2009. While the first $2,400 of unemployment benefits were exempt in 2009, this rule was not applicable in 2010. And with this revision, each and every penny is taxable and will be used to determine whether the tax payer must file a return or not. If the amount, when combined with other income, falls below the requirement to file the taxpayer would not be required to file a return. Though they may be due a refund if they have withholding and it could be to their benefit to file. It is always best to speak with a tax professional to determine your situation. As the unemployment rate continues to rise, hitting an astounding 9.2% in June 2011, the reality of having to survive on unemployment benefits may have to ride out much longer than former wage earners may have expected. Giving out-of-work Americans one less thing to worry about, we’ve compiled a list of important facts and suggestions regarding your tax bill.
Verify withholdings from your final check.
Did you opt out of federal income tax withholding from your unemployment checks? If so, you may have to pay more at tax time. To avoid a potential penalty, opt back in to have withholdings taken out or consider making estimated payments during the year
Withdrawals from your retirement account are taxed.
Unless those funds were transferred to a qualifying retirement account, like an IRA, plan on paying tax. Also note that some actions – like not rolling over funds into an IRA within 60 days – are irreversible for federal income tax purposes. In this case, penalties may apply. Tax implications on withdrawals from retirement accounts are a bit cryptic, so we encourage you to speak with a professional tax service on the matter.
Take advantage of deductions.
Did you know that expenses incurred while looking for a new job are deductible? Those expenses would be reported on your Schedule A, assuming you itemize your deductions, as miscellaneous expenses that exceed 2% of your adjusted gross income (AGI). Bear in mind, however, that these deductions can only be reported for those seeking employment in the same profession or industry. In other words, this is not the time to make that leap of faith from attorney to chef extraordinaire.
Don’t forget about those credits!
When preparing your taxes, consider taking credits, like the Earned Income Credit, you may not have qualified for in previous years. For 2011, you may be eligible if your earned income and AGI are both less than: $43,998 ($49,078 married filing jointly) with three or more qualifying children; $40,964 ($46,044 married filing jointly) with two qualifying children; $36,052 ($41,132 married filing jointly) with one qualifying child; and $13,660 ($18,740 married filing jointly) with no qualifying children. Additionally, your investment income must be $3,150 or less for the year.
Knowledge is power and, when it comes to the IRS, ignorance is not bliss. While we’ve only begun to touch the surface, a host of additional">http://blogs.forbes.com/kellyphillipserb/2011/07/10/with-job-losses-soaring-ten-tax-tips-for-the-unemployed/">additional tips are available for out-of-work taxpayers. Consult your tax preparer, or local tax office, for these and other ways to help reduce your tax burden.